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Morocco-UAE: What happened to the FTAs?

Morocco Times

Morocco - UAE: What happened to the FTAs?

Oxford Business Group

4 December 2005

Recent difficulties in the implementation of Morocco’s free trade agreement with the UAE have raised questions regarding the kingdom’s readiness for trade liberalisation. They might also further delay the entry into force of more crucial free trade deals.

A recent meeting between Moroccan and UAE officials evidenced hitches in the implementation of the free trade area between the two parties, which came into force in July 2003.

There have been mounting complaints from Moroccan businesses that the free trade area has been detrimental to their interests, especially because of a lack of clarity in the rules governing its application.

While Moroccan entrepreneurs have traditionally been tempted to delay - and
sometimes to derail - the entry into force of free trade agreements simply in order to maintain their national market under protection, in this case their claims appear to be fairly well grounded.

The first serious incident took place a few weeks ago, when a local importer, Stock Pralim Ltd., broke fresh ground by defeating Nestlé Morocco in a tender to provide the kingdom’s armed forces with powdered milk.

Nestlé Morocco, the armed force’s regular supplier, was prompt to raise objections against what it deemed to be unfair competition.

Although the free trade agreement provides for the abolition of excise duties on milk derivatives, Moroccan customs blocked the first delivery, worth $540,000, requiring the importer to pay the normal duties. The reason for this decision was that the rule of origin was not respected.

Indeed, the agreement between Morocco and the UAE stipulates that the abolition of excise duties is applicable only for goods that incorporate at least 40% local value-added. Nestlé Morocco has argued that Emirati powdered milk could not fulfil this criteria, since it originates in New Zealand.

The managers of Stock Pralim Ltd. should soon be attended by high-level executives at the Ministry of Foreign Trade to try and solve the dispute.

The same issue arose in the sugar market when Moroccan food-processing industries concluded a supply deal with the UAE’s Khalij Sugar, hoping to increase their competitiveness against EU producers, which can supply confectionary products 10-20% cheaper than local producers due to the high price of sugar on the Moroccan market. Morocco’s state-owned sugar producer, Cosumar, charges $0.60 a kilo, while Khalij could supply it for less than half this price.

Based on the same rule of origin, Moroccan customs charged importers a 120% duty, thus inflating the cost of imported sugar to $0.63. Confectioners cried foul, arguing the measure was aimed at artificially protecting Cosumar against foreign competition.

Challenged on its commitment to free trade, the Moroccan government has blown hot and cold. While acknowledging it couldn’t conclude free trade agreements only to block their implementation, Mezouar underlined that the UAE had moved back six months the meeting of the technical commission in charge of examining the agreement’s applicability, citing the lack of availability of relevant trade representatives. Finally, Morocco established that the commission’s meeting will be held before the end of 2005.

In both of the above cases, although the UAE imported the raw material, documents issued by the Emirati Ministry of Economy and ports authority establish that the finished products integrate over 40% local value-added - a fact Moroccan producers resolutely challenge. The Moroccan Ministry of Trade and Industry explains that it does not question the authenticity of these documents, but simply follows routine monitoring procedures.

Whatever the outcome of the rule of origin dispute, the controversy has drawn attention to one of the most serious caveats free trade agreements impose upon countries such as Morocco, where internal market distortions tend to hamper the competitiveness of local producers.

Sugar is the perfect example of the liberalisation conundrum Morocco is facing. Lifting trade barriers would endanger the local sugar industry, while maintaining them is endangering domestic processing industries, which are at pains to compete against rivals that benefit from trade liberalisation, especially in the form of cheaper inputs.

The problem is even more acute with wheat. The high price of this commodity on the domestic market, due to higher local production costs and 105 to 115% duties on imports, makes it all but impossible for local producers of pasta and couscous to hold their own against foreign competitors.

Moroccan trade officials seem to have underestimated this crucial issue, which might explain the current vagueness of the government’s position in this respect.

Many of the country’s most sensitive markets, however, are poised to be affected by a series of free trade agreements with Arab countries in the framework of the Agadir process. This aims at establishing a free trade area between the Arab Mediterranean nations, and with this on the horizon, the Moroccan government will have to address this challenge soon - and with vision.

Indeed, failure here might jeopardise the implementation of the free trade deal the kingdom concluded with the US in mid-2004. Initially scheduled for July this year, its entry into force has already been postponed to an unspecified date in 2006, thus upsetting a number of Moroccan exporters, who had invested in order to take advantage of the preferential access to the US market. These exporters are already complaining this delay is depriving them of orders worth some $50m.

With the implementation of another important free trade agreement with Turkey also shelved, it is high time for Morocco to come up with a clear and inclusive vision of its foreign trade policy - and to stick to it.